OK, Maybe the Yuan Is Undervalued by a Smidgeon

A vegetable vendor holds a stack of Chinese yuan banknotes at a morning market in Shenyang, Liaoning province, June 10, 2014.

Reuters

This just in from the Peterson Institute for International Economics: the yuan is a smidgeon undervalued. Hey, let’s call it pretty much fairly valued.

China Real Time has diligently reported the Peterson Institute’s slugfest over the yuan, in which researcher vs. researcher battles have reached nearly the blue vs. grey stage. And now this: William Cline, the Peterson Institute’s main currency valuation man, has come to a new conclusion. The veteran economist says in a report that the yuan is 1.1% undervalued, when accounting for inflation. That’s it. A measly 1.1%.

Such a conclusion flies in the face of what U.S. politicians have been saying for years — namely, that Beijing manipulates its currency to give its traders an unfair edge. China, meanwhile, has argued for some time that the yuan is approaching its “equilibrium rate,” meaning the yuan doesn’t need to move much, if at all, to be fairly valued.

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Mr. Cline does say that the yuan was once reallyundervalued, back in mid-2008. Mr. Cline estimated that at the time, the yuan was 18.4% below its fair value, as China’s current account surplus was ballooning.

Now, though, China doesn’t make his list of “substantially undervalued” currencies around the world. Instead, he cites those of Singapore (23.1%), Taiwan (14.1%), Sweden (8%) and Switzerland (5.8%). Let’s be honest, do the currency policies of those countries make anyone’s blood boil? Even that of U.S. Congress members, usually quick to come out swinging on the issue?

On the flip side, here are countries with “substantially overvalued” currencies, according to Mr. Cline: New Zealand (15.4%), Turkey (12.9%), Brazil (9%) and South Africa (8.8%). Expect to hear a lot of complaints from leaders of those countries when they show up at international economic confabs in response, as the Peterson Institute is probably the world’s leading international economics think tank.

Mr. Cline has a fairly forgiving way of evaluating over/undervaluation. He looks at whether a country is likely to run a current account surplus or deficit over the coming years, and if so, how large. Then he analyzes what kind of currency adjustment is necessary for that country to reduce its surplus or deficit to within 3% of its GDP.

Maybe the biggest surprise of Mr. Cline’s findings is that the Japanese yen, which has depreciated about 25% since early July 2012, is still overvalued by 0.9% when accounting for inflation. How could that be? The big depreciation has given a boost to exports, Mr. Cline notes — and there may be bigger such boosts in the pipeline because it takes time for a depreciation to work its way through the economy. But at the same time, energy imports have risen sharply because of the shutdown of nuclear power plant after the 2011 Fukushima disaster. Mr. Cline calls all this the “Japan Paradox.”

But let’s get back to China and yuan valuation infighting.

With so many strong personalities, Mr. Cline’s won’t the last word. Those who think the yuan is seriously undervalued can point to a recent IMF evaluation of the yuan as “moderately undervalued,” which in IMF-speak means 5% to 10% undervalued.

In an email exchange with China Real Time, Peterson’s founder, Fred Bergsten, said he thought that Mr. Cline’s target of 3% current account is too easy. He figures the best way to determine whether a currency is undervalued is look at whether a country’s central bank is intervening to push down the value of the currency even as money pours into the country. That describes China precisely.

“My much higher estimate (of China’s currency undervaluation) is based on the more ambitious goal of eliminating that surplus, which we think is a minimum requirement for both economic and political reasons,” said Mr. Bergsten.

Plus he still argues that the U.S. should haul China before the World Trade Organization and sue it for using currency policy as a subsidy — a tactic, as China Real Time has noted, that has only been tried only by one president, the one on “House of Cards.”

“I do indeed continue to believe that the U.S. (hopefully with a number of allies) should take China to the WTO and implement a new policy of ‘countervailing currency intervention’ (my invention as you may recall) and insist on currency chapters in TPP (Trans-Pacific Partnership) and future trade agreements,” Mr. Bergsten wrote (emphasis his).

More is sure to come, especially as the Congressional mid-term elections draw near. China’s currency policies are always fodder for the campaign trail.

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